When 73-year-old President Donald Trump signed tax reform into law Dec. 22, 2017, Wall Street had high hopes that the dramatic cut in corporate taxes would spur an economic boom. While the Gross Domestic Product [GDP] did rise from one percent under former President Barack Obama, it never hit the four percent promised by Trump. Trump’s worst nightmare started Feb. 5, 2018, the day 66-year-old Federal Reserve Board Chairman Jerome Powell took the reins from former Fed Chairwoman Janet Yellen. Powell took the reins and proceeded to raise the Federal Funds Rate four times in 2018, pumping the brakes on the economy at a time Trump hoped tax cuts would provide extra fiscal stimulus. When the dust settled, the economy started slowing, as expected, in 2019, leaving it where it is today in a slowdown phase, with GDP heading back to Obama levels.
If trends continue, GDP growth has fallen from 2.9% to 2.1% in Q-2, one half of what Trump wnted. Obama hit his best growth rate, without Trump’s corporate tax cuts, at 2.4% in 2017. Trump’s tax cuts only jumped GDP to 2.9% in 2018, offset by Powell’s rate hikes. Trump often blames Powell for sabotaging his economy, getting push back from Powell, claiming the Fed should remain independent of politics. When Powell started hiking rates last year, Trump wasn’t the only one shaking their head. With inflation tame, Powell had no justification for hiking rates other than putting a damper on inflation that turned out to be nonexistent. Over the last 11 years, since financial markets crashed in 2008 with bankruptcies of Lehman Bros. and Bear Stearns, recovery has been slow. When General Motors [GM] and Chrysler teetered on bankruptcy, former Fed Chairman Ben Bernanke went into overdrive.
Bernanke, a Princeton University economist with a specialty in the Great Depression, slashed the Federal Funds Rate Dec. 16, 2008 to zero-to-a-quarter-percent, giving the economy emergency CPR. Former Fed Chairman Alan Greenspan called the 2008 economic collapse the Great Recession, resembling past U.S. financial panics, especially the Financial Panic of 1914. Out of that economic crisis, Congress created the Federal Reserve Board to supply enough cash to banks that had run our out of money. Setting the record straight, the economy crashed under former President George W. Bush, handing Obama the worst recession since the Great Depression. Greenspan, who finished his term Jan. 30, 2006, said the Great Recession could take a generation to correct, leaving Obama’s economy struggling to get on track. By the time Trump came around Jan. 20, 2017, the economy was in recovery.
Trump hoped that his tax reform would provide enough fiscal stimulus to see GDP expand eventually to four percent. Trump couldn’t control Powell’s misread on the economy, thinking that nflation was heating up. Under Obama, the U.S. economy was in a deflationary mode, where sluggish consumer spending kept GDP suppressed to around one percent. Only in Obama’s final year in office did GDP hit 2.1%, prompting Trump to push hard for tax cuts. Trump’s trade war with China, slapping tariffs on $250 billion in Chinese goods, has taken about one-half-percent off GDP, according to Christine Legarde, Secretary-General of the Washington-based International Monetary Fund [IMF]. With Trump threatening more tariffs on $300 billion goods, Wall Streets started selling off. A recent survey by Duke University indicated that two-thirds of CEOs see recession in 2020.
Unable to switch gears with China, Trump’s key economic advisers Larry Kudlow and Peter Navarro show no signs of letting up. Most economists see the China trade war as counterproductive to both countries. Kudlow and Navarro don’t see the big picture that if the economy heads south, so does Trump’s chances of reelection. With Powell started to slash rates, it’s a clear indication that the economy is slowing down. Global trends in China and Europe have the Shanghai-based Chinese Central Bank and Frankfurt-based European Central Bank [ECB] already slashing rates. Unlike the U.S, the EU isn’t in a trade war with China, leaving the ECB better poised to weather out the storm than the U.S. Morgan Stanley’s Business Conditions Index [BCI] hit the lowest level since the 2008 Great Recession. Without Trump ending his trade war with China, recession is on the way.
Trump can’t expect consumers to bail the U.S. out of recession. Economists, like Alliances SE chief economist Mohammed El-Erian, can’t figure out why record unemployment hasn’t translated into more consumer-spending. U.S. workers find themselves in more part-time jobs, forced to pay for their own health insurance and retirements. With rent and health care costs rising, including prescription drugs soaring, most consumers don’t have enough discretionary cash to boost GDP. Continuing the Trade War has put a real drag on the U.S. economy at a time when the global economy has begun to slow down. Unless Trump pivots quickly, ending the China Trade War, he could find the U.S. economy heading into recession in an Election Year. Unlike Obama who let the economy manage him, Trump has pulled the wrong levers, leading the economy into recession in 2020.
